Context: Last year, Mr Justice James Mellor of the England & Wales High Court determined that InterDigital was entitled to only $0.175 per Lenovo phone (March 16, 2023 judgment). Emboldened by that outcome (as well as the one in Optis v. Apple), Lenovo has recently presented in the UK all sorts of novel and aggressive legal theories surrounding standard-essential patents (SEPs) (May 5, 2024 ip fray article). A preliminary injunction bid against Ericsson failed (May 23, 2024 ip fray article), but a particularly odd theory in a case against InterDigital survived a jurisdictional challenge (May 5, 2024 ip fray article). In parallel (later-filed) infringement litigation, the Munich I Regional Court enjoined Lenovo over an InterDigital SEP and rejected the assertion that Lenovo was a willing license only because it would conclude a license on the basis of Mr Justice Mellor’s determination (May 15, 2024 ip fray article).
What’s new: The England & Wales Court of Appeal (EWCA) is hearing the InterDigital-Lenovo cross-appeal (with InterDigital obviously having had the more pressing reason to appeal) this week. The panel consisting of Lord Justices Arnold (presiding), Nugee and Birss appears rather sympathetic to InterDigital’s argument that the $0.175/unit rate grossly undervalues its portfolio. While the appeal didn’t have visible traction on the first day, affirmance appears unlikely now after the third part. A complete reversal to the extent that InterDigital’s proposed rate (approximately $0.50/unit) would be adopted is not the most likely outcome now, yet more likely than affirmance.
Direct impact: In the combination of InterDigital’s UK appeal being reasonably likely to result in an upward adjustment of the royalty rate and the ongoing enforcement of a German injunction, Lenovo will now have to give serious consideration to the possibility of taking a license. At the same time, InterDigital may also prefer not to await a formal decision by the appeals court, as even a significantly increased rate could still fall far short of InterDigital’s expectations.
Wider ramifications: On several previous occasions, ip fray stated that some implementers (also including Tesla) may be mistaken to consider the UK a jurisdiction favoring the devaluation of SEPs only because of two High Court rulings (InterDigital v. Lenovo and Optis v. Apple) that came down last year, but could be overturned on appeal.
It is always a bit risky to draw conclusions from what judges say at hearings or trials, but it is perfectly legitimate to try to make an educated guess, despite the caveat that judges may just seek to challenge a party to advance its best arguments or change their positions post-hearing.
With the explicit disclaimer that it was too early for a reasonably reliable prediction, ip fray said on Monday that during the first day of the appellate hearing there was no strong indication of the appeals court being inclined to overrule Mr Justice Mellor (June 10, 2024 LinkedIn post by ip fray). Yesterday, ip fray provided an update: the appeal had traction at that point (June 11, 2024 LinkedIn post by ip fray).
This afternoon by UK time, the hearing continued, and it became even clearer than yesterday that Lenovo is probably not going to be able to defend the lower court’s rate-setting decision, at least not to the full extent.
All three members of the appellate panel appear to disagree with, or at minimum to be unconvinced of, the lower court’s FRAND determination. Lord Justice Arnold is one of the most experienced UK patent judges and can be described as IP-friendly, but rather balanced. Lord Justice Birss is less balanced. He’s very much on the side of patent holders, and his own FRAND determination in Unwired Planet v. Huawei was unsophisticated to put it mildly: he simply assumed that either side was off by the same factor. No FRAND decision in a common law jurisdiction has been as unscientific and uneconomic as that one. It is almost ironic to see him on an appellate panel now, analyzing a judgment that one may or may not fully agree with, but which is about 100 if not 1,000 times more substantive and thoughtful than what he put out in Unwired.
Lord Justice Birss made a statement today that is better than his Unwired rate-setting (lack of) logic, but not correct either. James Segan KC, Lenovo’s lead counsel, ccontradicted his own original theory that licensees don’t care about whether any discounts are applied to past or future sales by saying that licensees compete with each other, so someone who takes a license may have an interest in the future rate being higher (by applying discounts only to past sales) in order to make a license more expensive for rivals. Now, the contradiction is indeed an issue. What Lord Justice Birss said was that it wouldn’t make sense for a licensee to do so, given that the same licensee would need to negotiate the next license in a matter of years (when the latest agreement is about to expire or has already expired). Three things must be said about that:
- The reality in the licensing business is that it’s always the licensors who are more willing to grant a discount on catch-up payments (royalties on past sales). Of course, a judge does not negotiate licenses: the courts just see documents and hear testimony about that process. But that is the reality. If licensors are prepared to make concessions in negotiations, past sales is where they start.
- There’s nothing that stops the same implementer from telling the same counterpart, say, five or seven years later that the starting point is the average per-unit royalty agreed upon last time between the same two parties. And the same implementer can make that argument if there’s litigation between them next time. There are some arguments in InterDigital v. Lenovo about statutes of limitation that make it difficult to recover royalties from many years back, but that is not the license renewal scenario Lord Justice Birss was referring to.
- Lord Justice Birss also didn’t consider that corporate executives have to focus on the next few years (sometimes the next few quarters). If you’re in charge of negotiating licenses for a given implementer today, it’s far from a given (and in many cases even unlikely) that you’ll still be doing that when the deal is up for renewal.
Lenovo’s problem is that there are three judges who are sympathetic to patentees, and that includes being receptive to InterDigital’s argument that its heavy discounts for large-scale implementers like Apple and Samsung reflect the impact of hold-out. Mr. Segan tried to counter that argument by saying something that ip fray clearly disagrees with: he said that if hold-out was a factor, license agreements that involved catch-up payments for past use would have to have a lower per-unit rate than those that don’t. The fallacy in that argument is simply that a credible (explicit or implicit) threat of hold-out is enough to impact negotiations. Even if someone doesn’t let the agreement expire and litigate for years, the licensor may massively discount its royalty rate just because it can’t or doesn’t want to take the risk of a dispute.
In InterDigital’s case, it’s clear (based on the numbers that became known as a result of the Lenovo dispute) that they cave to particularly two companies: Apple and Samsung. Either one of them makes royalty payments that represent about 25% of InterDigital’s total revenues and is prepared to challenge dozens of patents in a SEP dispute, even patents that weren’t and aren’t actually asserted. They’ve shown it against Ericsson, for instance, but Ericsson has other revenue sources than patent licensing, unlike InterDigital.
Apple or Samsung don’t even have to tell InterDigital that they plan to litigate for years if need be. It’s obvious that it’s always an option, and that sometimes they actually do it. It’s also obvious to InterDigital that a few quarters without payments from one of those companies will have cash-flow effects and particularly get the stock market nervous, which then affects executive compensation. And the closer to the expiration of an old license agreement, the greater the pressure on InterDigital. In the days following expiration, where the decision on whether or not to launch enforcement actions has to be made, the pressure is still high, and the royalty rate may go down. In those cases, there is no catch-up period, but hold-out was a factor.
The appeal focuses, as did the lower court’s ruling, on comparable license agreements and what to conclude from them. That involves the question of whether Mr Justice Mellor did a sufficient cross-check. There is also the question of whether, if the appeals court (as it probably will) disagrees with the reliance upon a single license (LG), the royalty rate could be affirmed on other grounds.
But there is no discussion of what the fair value, regardless of the outcome of past negotiations, of InterDigital’s portfolio would be. To some extent, the issue came up. Mr. Segan claimed that InterDigital obtains a relatively high number of patents per invention (he suggested that when they make five or six inventions, they file for 50 or 60 patents related to them, just to inflate their portfolio size). That is not what the court focuses on.
The philosophical question is this: if a company like InterDigital grants the likes of Apple and Samsung a huge discount because of (fear of) hold-out, is that rate then FRAND and what they charge others (such as Fairphone, a company from which they presumably collected royalties only to have a comparable license agreement with a higher per.-unit rate to show) is supra-FRAND, or does it work the other way round and what the little guys pay is a FRAND rate (theoretically, even that rate could be sub-FRAND) and the big guys use hold-out to pay only a fraction of FRAND?
The court challenged Mr. Segan’s assumption that the lowest rate actually paid by someone must be FRAND and that hold-out did not result in a sub-FRAND rate. Mr. Segan did not have a convincing answer. But it’s also a fact that a company like Fairphone, which at the time of the conclusion of that license agreements was still an SME even by the narrow EU definition of SMEs, may have been a sophisticated negotiator but simply lacked the litigation budget to pick a fight. So the fact that Fairphone paid a certain amount is not a validation of fair market value or anything. Maybe the fair market value is actually even higher, but even if it was only a fraction, Fairphone wouldn’t have had a viable alternative to that deal.
Lenovo has a pretty good argument that the evidence (at least according to Lenovo’s representation, which ip fray obviously can’t verify for lack of access to the confidential record) shows discounts were basically just put into those agreements after the parties had agreed on a rate, only because InterDigital wanted to put its standard royalty rate as a headline rate in those agreements and work it down from there. And in any event, discounts that amount (in the aggregate of different discounts) to 80% or 90% are, as Mr Justice Mellor rightly concluded, not really discounts: it means there are completely different sets of per-unit license fees.
Of the three judges, Lord Justice Nugee’s positions on SEPs are the ones that are least known. Lord Justice Arnold appeared more balanced than the others, but still disinclined to affirm the lower court’s decision.
Lenovo presumably sees the writing on the wall. It’s unlikely to win the UK appeal. It knows that it has a problem in Germany, where it can’t offer its cellular-connectivity devices anymore on its own website (though they apparently sold huge quantities to their German resellers before the injunction took effect). And the Munich I Regional Court was right to decline Lenovo’s invitation to rely on the UK FRAND determination in its own willingness analysis: the doubts that the UK appeals court has voiced validate the German judges’ thinking in that regard.
Lenovo placed a bet on the UK. Its forum-shopping (they even brought a proactive case to force InterDigital to grant a global license on UK-determined terms) does not appear to be working out. Other SEP implementers, such as Tesla, should also take note. The England & Wales Court of Appeal will not allow the UK to be used by licensees of SEPs for the purpose of SEP devaluation. That’s clear by now, though the appellate hearing may still last a day or two (or theoretically more).